Updated on February 22nd, 2021 by Bob Ciura
When it comes to dividend investing, the Dividend Aristocrats are the “cream of the crop.” The Dividend Aristocrats are stocks in the S&P 500 Index, with 25+ consecutive years of dividend increases. There are just 65 companies that have attained Dividend Aristocrat status.
As a result, it is not easy to join the Dividend Aristocrats list. With that in mind, we created a downloadable list of all 65 Dividend Aristocrats, along with important metrics like dividend yields and price-to-earnings ratios. You can download a free copy of the Dividend Aristocrats list by clicking on the link below:
There are thousands of dividend stocks to choose from, but the Dividend Aristocrats are a unique group. The Dividend Aristocrats have profitable businesses, and the ability to grow their profits over time. This allows them to withstand recessions, and continue increasing their dividends each year.
Franklin Resources (BEN) has increased its dividend for 41 consecutive years, and the stock has a high dividend yield of 4%.
Franklin Resources has endured a few tough years. Still, given the company’s track record of dividend growth and current yield, Franklin Resources is an attractive stock for income investors.
Business Overview
Franklin Resources is an investment management company. It was founded in 1947 in New York, by Rupert H. Johnson Sr., who had previously managed a Wall Street brokerage firm. He named the company after Benjamin Franklin, the founding father who was viewed as a symbol for frugality, saving, and wise investments.
Today, Franklin Resources manages the Franklin and Templeton families of mutual funds. The company ended 2020 with assets under management of $1.498 trillion. It has diversified AUM and a strong performance track record.
Source: Investor Presentation
The past few years have been difficult for Franklin Resources. Franklin Resources was slow to adapt to the changing environment in the asset management industry. The explosive growth in exchange-traded funds and indexing investing caught traditional mutual funds by surprise.
ETFs have become very popular with investors due in large part to their lower fees than traditional mutual funds. In response, the asset management industry has had to cut fees and commissions, or risk losing client assets.
Franklin Resources also struggled last year due to the broad deterioration in the global economy caused by the coronavirus pandemic. Fortunately, things are finally looking up in the new fiscal year.
Growth Prospects
Despite the difficult operating environment, there are reasons to be optimistic about the company’s long-term growth. First, the U.S. is an aging population. There are thousands of Baby Boomers retiring every day. Combined with rising life expectancy, there is a great need for investment planning for those in or nearing retirement.
Franklin Resources is attempting to remedy its issues, mainly with acquisitions. Last year, the company acquired Legg Mason for $4.5 billion in cash, to go along with the assumption of $2 billion in debt. The deal created an industry giant with a combined $1.5 trillion in AUM.
The Legg Mason acquisition has helped Franklin Resources return to growth. On February 2nd, 2021 Franklin Resources reported results for the first quarter of fiscal 2021. Total assets under management equaled $1.498 trillion, a 6% increase from last quarter, driven by $93.8 billion in market gains, partially offset by $10.2 billion of cash management outflows and $4.5 billion of long-term net outflows.
For the quarter, operating revenue totaled $1.995 billion. This figure represented 0.138% of average AUM or ~55 basis points on an annualized basis. On an adjusted basis, net income equaled $373.4 million or $0.73 per share compared to $338.3 million or $0.67 per share in the same quarter last year.
We feel investors can reasonably expect 4% annual earnings-per-share growth over the next five years. Earnings-per-share growth will be driven by revenue growth, mainly due to rising AUM, as well as a boost from share repurchases.
Competitive Advantages & Recession Performance
Asset management is a highly competitive business, and there are not many competitive advantages in the financial services industry. The ability to retain clients depends largely on performance. If funds perform worse than their benchmarks, clients typically withdraw their funds.
However, Franklin Resources has a few advantages going for it. The first, and perhaps most important, is brand recognition. Franklin Resources has been in operation for over 70 years. That indicates a certain developed expertise and some innate investment abilities. Franklin Resources also still has huge assets under management, allowing the company to offer a wide range of investment opportunities to clients and generate some economies of scale.
Counterbalancing these advantages, Franklin Resources most recent recession performance was poor:
- 2007 earnings-per-share of $2.37
- 2008 earnings-per-share of $2.24 (5.5% decline)
- 2009 earnings-per-share of $1.30 (42% decline)
- 2010 earnings-per-share of $2.12 (63% increase)
As you can see, earnings-per-share fell steeply in 2009 during the worst part of the Great Recession. This should come as no surprise, since investing is hardly recession-resistant. During recessions, stock markets typically decline. For asset managers, this can lower assets under management and fees. That said, Franklin Resources recovered quickly, and saw earnings jump in 2010 and thereafter.
While the company entered another downturn in fiscal 2020 due to the coronavirus pandemic, the company remained profitable, which allowed it to continue raising its dividend. It is also in position to return to growth in the current fiscal year, assuming a continued economic recovery.
Valuation & Expected Returns
We expect that Franklin Resources will earn $2.60 per share in fiscal year 2021. The stock has a price-to-earnings ratio of 10.5. This is slightly above our fair value P/E estimate of 10. A declining valuation multiple could reduce annual returns by 1% per year.
Earnings-per-share growth and dividends will generate positive returns for shareholders. Franklin Resources has an attractive dividend yield of 4%, and the dividend payout appears to be secure. A breakdown of potential returns is as follows:
- 4.0% earnings-per-share growth
- 4.0% dividend yield
- -1.0% valuation reduction
If Franklin Resources can return to growth investors buying the stock now could see annual returns of 7.0% over the next five years.
Final Thoughts
Franklin Resources’ future growth depends on a strong economy, rising stock prices, and increasing assets under management. The acquisition of Legg Mason is a major growth catalyst moving forward.
With a strong 4% dividend yield and a positive growth outlook, Franklin Resources could be attractive for income investors.
However, given that expected annual returns are below 10%, investors interested in the stock are encouraged to wait for a pullback or an improvement in fundamentals before buying Franklin Resources. As such, the stock receives a hold recommendation.